UNIVERSITY OF SAINT LOUIS

Integrated Managerial Accounting (Acctg 26&27)

DIAGNOSTIC EXAM 2018
Instructions: Kindly answer the following questions correctly. Place your answers on a separate ONE-HALF LENGTHWISE paper. Erasures are strictly NOT allowed and will render your answers void.

Basic Consideration in MAS expenses, the total expense line relative to its previous position will shift:
1. A management advisory services engagement involves the following activities in what order? A. downward and have a flatter slope. C. upward and have a flatter slope.
I. Post-engagement follow-up. B. downward and have a steeper slope. D. upward and have a steeper slope.
II. Implementing the recommendation.
III. Conducting the engagement. 5. At a sales volume of $400,000, return on sales is 10%. At a $600,000 volume, return on
IV. Negotiating the engagement. sales is 20%. What is the break-even volume?
V. Preparing for and starting the engagement. A. $160,000 C. $300,000
VI. Evaluating the engagement. B. $210,000 D. $420,000
VII. Preparing and presenting report and recommendations. (E2)
A. III, IV, V, VI, VII, I and II. C. IV, V, III, VII, II, VI, and I. 6. The following data have been provided by a retailer that sells a single product.
B. IV, III, V, VI, II, VII, and I. D. VII, VI, V, IV, III, II and I. This Year Last Year
Units sold 200,000 150,000
Cost Behavior Sales revenue $1,000,000 $750,000
2. NTQ, Inc.’s net sales in 1996 were 15% below the 1995 level. NTQ’s semi-variable costs Less cost of goods sold 700,000 525,000
would Gross margin $ 300,000 $225,000
A. Increase in total and increase as a percentage of net sales. Less operating expenses 222,000 210,000
B. Increase in total, but decrease as a percentage of net sales. Net income $ 78,000 $ 15,000
C. Decrease in total, but increase as a percentage of net sales. What is the best estimate of the company's contribution margin for this year?
D. Decrease in total and decrease as a percentage of net sales. A. $120,000 C. $252,000
B. $158,000 D. $300,000
3. The following data have been provided by a retailer that sells a single product.
This Year Last Year 7. If the fixed costs for a product decrease and the variable costs (as a percentage of sales
Units sold 200,000 150,000 pesos) decrease, what will be the effect on the contribution margin ratio and the breakeven
Sales revenue $1,000,000 $750,000 point, respectively?
Less cost of goods sold 700,000 525,000 G&M A. B. C. D.
Gross margin $ 300,000 $225,000 Contribution margin rate Increased Increased Decreased Decreased
Less operating expenses 222,000 210,000 Breakeven point Increased Decreased Increased Decreased
Net income $ 78,000 $ 15,000
What is the best estimate of the company's variable operating expenses per unit? Standard Cost System & Variance Analysis
A. $0.24 per unit C. $0.90 per unit 8. JKL Company has a standard of 15 parts of component X costing P1.50 each. JKL
B. $0.71 per unit D. $4.17 per unit purchased 14,910 units of component X for P22,145. JKL generated a P220 favorable price
variance and a P3,735 favorable quantity variance. If there were no changes in the
Cost-Volume-Profit Analysis component inventory, how many units of finished product were produced?
4. If a company decreases the variable expense per unit while increasing the total fixed A. 994 units. C. 1,090 units.
 B. 1,000 units D. 1,160 units B. Under absorption costing, operating profit is a function of both sales volume and
production volume.
9. For the doughnuts of McDonut Co. the Purchasing Manager decided to buy 65,000 bags of C. Absorption costing enables managers to increase operating profits in the short run by
flour with a quality rating two grades below that which the company normally purchased. This increasing inventories.
purchase covered about 90% of the flour requirement for the period. As to the material D. A manager who is evaluated based on variable costing operating profit would be tempted
variances, what will be the likely effect? to increase production at the end of a period in order to get a more favorable review.
A. B. C. D.
Price variance Favorable Favorable Unfavorable No effect 14. A manufacturing company employs variable costing for internal reporting and analysis
Usage variance Favorable Unfavorable Favorable Unfavorable purposes. However, it converts its records to absorption costing for external reporting. The
10. MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure 
Accounting Department always reconciles the two operating income figures to assure that 
no
checks) for cars. The company advertises that all services are completed within 15 minutes errors have occurred in the conversion. The fixed manufacturing overhead cost per unit 
was

for each service. On a recent Saturday, 160 cars were serviced, resulting in the following based on the planned level of production of 480,000 units. Financial data for the year 
are

labor variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil’s standard labor presented below:

rate is $7 per hour, determine the actual wage rate per hour and the actual hours worked. Budget Actual
A. B. C. D. Sales (in units) 495,000 510,000
Wage Rate $6.55 $6.67 $7.45 $7.50 Production (in units) 480,000 500,000
Hours Worked 42.00 42.71 42.00 38.00 Variable Costing Absorption Costing
Variable costs $10.00 $10.00
11. During 1990, a department’s three-variance factory O/H standard costing system reported Fixed manufacturing overhead 0 6.00
unfavorable spending and volume variances. The activity level selected for allocating factory Total unit manufacturing costs $10.00 $16.00
O/H to the product was based on 80% of practical capacity. If 100% of practical capacity had The difference between the operating income calculated under the variable costing method
been selected instead, how would the reported unfavorable spending and volume variances and the operating income calculated under the absorption costing method would be
have been affected? A. $57,600 C. $90,000
B. $60,000 D. $120,000
A. B. C. D.
Spending Variance Increased Increased Unchanged Unchanged 15. The following information was extracted from the first year absorption-based accounting
Volume Variance Increased Unchanged Increased Unchanged records of Confused Co.
Total fixed costs incurred $100,000
Variable & Absorption Costing Total variable costs incurred 50,000
12. The change in period-to-period operating income when using variable costing can be Total period costs incurred 70,000
explained by the change in the Total variable period costs incurred 30,000
A. Unit sales level multiplied by the unit sales price. Units produced 20,000
B. Unit sales level multiplied by a constant unit contribution margin. Units sold 12,000
C. Finished goods inventory level multiplied by the unit sales price. Unit sales price $12
D. Finished goods inventory level multiplied by a constant unit contribution margin. How much income (loss) before income taxes would it have reported under absorption
costing?
13. When comparing absorption costing with variable costing, which of the following statements is A. ($6,000) C. $26,000
not true? B. $2,000 D. $54,000
A. When sales volume is more than production volume, variable costing will result in higher
operating profit. Relevant Costing in Decision Making
16. When only differential manufacturing costs are taken into account for special-order pricing, an price of P12.875, the monthly usage at which it will be indifferent between purchasing and
essential assumption is that making Part QS42 is
A. Manufacturing fixed and variable costs are linear. A. 30,000 units. C. 48,000 units
B. Acceptance of the order will not affect regular sales. B. 32,000 units. D. 80,000 units
C. Selling and administrative fixed and variable costs are linear.
D. Acceptance of the order will not cause unit selling and administrative variable costs to 20. A manager is attempting to determine whether a segment of the business should be
increase. eliminated. The focus of attention for this decision should be on
17. Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a A. sales minus total expenses of the segment.
special order for 5,000 units of product, which normally sells for $35 per unit. Costs B. sales minus total direct expenses of the segment.
associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3; C. the net income shown on the segment's income statement.
applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow D. sales minus total variable expenses and avoidable fixed expenses of the segment.
the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50
and selling expenses would be decreased by $1. Responsibility Accounting & Transfer Pricing
If Sandow wants this special order to increase the total net income for the firm to $10,000, 21. Two examples of the learning and innovation measures of a balanced scorecard are (M2)
what sales price must be quoted for each of the 5,000 units? A. Employee training hours and product defect rates.
A. $23.50 C. $27.50 B. Employee promotion rate and number of environmental incidents.
B. $24.50 D. $34.00 C. Employee turnover rate and number of internal process improvements.
D. Number of employee suggestions and finished products per day per employee.
18. Kirklin Co. is a manufacturer operating at 90% of capacity. Kirklin has been offered a new
order at $7.25 per unit requiring 15% of capacity. No other use of the 10% current idle 22. JLC Inc. has these selected data:
capacity can be found. However, if the order were accepted, the subcontracting for the Units to be sold 25,000
required 5% additional capacity would cost $7.50 per unit. The variable cost of production for Total cost of the units P 500,000
Kirklin on a per-unit basis follows: Fixed capital investment 1,000,000
Materials $3.50 Variable capital on sales 20%
Labor 1.50 What should be the unit selling price to have a 15% return on investment?
Variable overhead 1.50 A. P26.78 C. P29.17
$6.50 B. P28.00 D. P30.80
In applying the contribution margin approach to evaluating whether to accept the new order,
assuming subcontracting, what is the average variable cost per unit? 23. Delmar Corporation is considering the use of residual income as a measure of the
A. $6.83 C. $7.17 performance of its divisions. What major disadvantage of this method should the company
B. $7.00 D. $7.25 consider before deciding to institute it?
A. opportunities may be undertaken which will decrease the overall return on investment.
19. Savage Industries is a multi-product company that currently manufactures 30,000 units of Part B. this method does not make allowance for difference in the size of compared divisions.
QS42 each month for use in production. The facilities now being used to produce Part QS42 C. residual income does not measure how effectively the division manager controls costs.
have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If D. the minimum required rate of return may eliminate desirable opportunities from
Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its consideration.
fixed costs would continue at 40% of their present amount. The variable production costs of
Part QS42 are P11 per unit. 24. The Bullwhip Division of Leather Products Co. is considering an investment in a new project.
If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase The project has an estimated cost of $1,000,000. If Leather Products Co. has a target rate of
 return of 12 percent, how large does the return on investment on this project need to be to A. $134,400 C. $144,000
generate $150,000 of residual income? B. $142,560 D. $167,718
A. 12% C. 25%
B. 15% D. 27% 29. The gross profit of Care Company for each of the years ended December 31, 2011 and 2010
follows:
25. Division X of Charter Corporation makes and sells a single product which is used by 2011 2010
manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers Sales P1,584,000 P1,600,000
at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is Cost of goods sold 928,000 960,000
$16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X Gross profit P 656,000 P 640,000
to use in its products. There would be no cost savings from transferring the units within the Assuming that 2011 selling prices were 10% lower, how did the amounts in sales and cost of
company rather than selling them on the outside market. What should be the lowest goods sold change due to change in unit selling price and unit cost, respectively?
acceptable transfer price from the perspective of Division X? (E1*) A. P160,000 increase; P96,000 increase C. P176,000 decrease; P128,000 decrease
A. $24.00 C. $17.60 B. P160,000 decrease; P96,000 decrease D. P176,000 increase; P128,000 increase
B. $21.40 D. $16.00
Financial Statement Analysis
Gross Profit Variation 30. A useful tool in financial statement analysis is the common-size financial statement. What
26. For a single-product company, the sales volume variance is does this tool enable the financial analyst to do?
A. The difference between flexible budget and actual sales volume, times master budget A. Ascertain the relative potential of companies of similar size in different industries.
unit contribution margin. B. Evaluate financial statements of companies within a given industry of approximately the
B. The difference between actual and master budget sales volume, times actual unit same value.
contribution margin. C. Determine which companies in the same industry are at approximately the same stage of
C. The difference between flexible budget and master budget sales volume, times master development.
budget unit contribution margin.
 D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company
D. The difference between flexible budget and master budget sales volume, times actual over time or between companies within a given industry without respect to relative size.
budget unit contribution margin.
31. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the
27. If a company has favorable sales volume variance, its year. At the end of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of
A. Income will be positive. 0.8 to 0.1 Which of the following could help explain the divergence in the ratios from the
B. Sales price variance is also favorable. beginning to the end of the year?
C. Total contribution margin will be more than planned. A. An increase in inventory levels during the year.
D. Total contribution margin might be less than planned. B. An increase in credit sales in relationship to sales
C. An increase in the use of payables during the current year.
28. Franklin Company's gross profit for year 2 and year 1 was as follows: D. An increase in the use of payables during the current year.
Year 2 Year 1
Sales $950,400 $960,000 32. Perry Technologies Inc. had the following financial information for the past year:
Cost of goods sold (556,800) (576,000) Sales $860,000 Inventory turnover 8x
Gross profit $393,600 $384,000 Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
Assuming that year 2 selling prices were 15% lower than year 1 selling prices, what was the
A. $ 61,429 C. $430,000
decrease in gross profit caused by the selling price change?
B. $107,500 D. $500,000
33. A corporation’s return on equity can be calculated if you know its 37. A company that maintains a raw material inventory, which is based on the following month's
A. Dividend yield and earnings yield. production needs, will purchase less material than it uses in a month where (M1**)
B. Market-to-book ratio and equity multiplier. A. sales exceed production.
C. Debt-equity ratio and market-to-book ratio. B. production exceeds sales.
D. Sustainable equity growth rate and dividend payout ratio. C. planned production exceeds the next month's planned production.
D. planned production is less than the next month's planned production.
34. The Intelinet Corporation and Comp Inc. have assets of $100,000 each and a return on
38. If a company has a policy of maintaining an inventory of finished goods at a specified
common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has half the
percentage of the next month's budgeted sales, budgeted production for January will exceed
sales of Intelinet. If Intelinet has net income of $10,000 and a total assets turnover ratio of 3.5,
budgeted sales for January when budgeted
what is Comp Inc.'s profit margin?
A. January sales exceed budgeted February sales.
A. 3.31% C. 10.00%
B. February sales exceed budgeted January sales.
B. 7.71% D. 13.50%
C. January sales exceed budgeted December sales.
D. December sales exceed budgeted January sales.
35. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president
is unhappy with the current return on assets, and he thinks it could be doubled. This could be
39. It is budgeting time for Del Co. The following assumptions were agreed upon for the next year
accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets
after a strategic planning session which covered a five-year horizon
turnover. What new asset turnover ratio, along with the 15% profit margin, is required to
1. Sales is estimated to be at 70,000 units at its national selling price of P126.00. 75%
double the return on assets?
of total sales are on credit. 1.5% of net sales is provided for doubtful accounts.
A. 35% C. 45%
2. Sales discounts are given to various customers at different rates and net to gross ratio
B. 40% D. 50%
is at 93%
3. Mark-up on merchandise is at 45% of invoice cost. Beginning inventory is P80,900
Budgeting & Modelling
and is expected to be reduced by P15,000 at the end of the period.
36. Sta. Barbara is one of the manufacturers of a part used in the production of a popular
4. Selling and administrative expenses is expected to be 15% of gross sales.
consumer product. Sales of the consumer product in 1985 are estimated at 5,000,000 units.
5. Depreciation is computed at P500,000.
Sta. Barbara regularly supplies 40% of the parts used in the new products. Two parts units
The projected operating income for the year is
are needed for each product unit. Aside from the new products, there is also a replacement
A. P173,802 C. P252,741
parts market. Over the past three years, the company has sold the following number of
B. P252,341 D. P296,841
replacement parts:
1982 300,000 Cost of Capital
1983 330,000 40. The three elements needed to estimate the cost of equity capital for use in determining a
1984 363,000 firm's weighted-average cost of capital are
This trend is expected to continue. The parts are sold for P4 per piece in the new products A. Current dividends per share, expected growth rate in dividends per share, and current
market and P4.50 in the replacement parts market. book value per share of common stock.
The amount of expected revenue based on the estimated number of parts to be sold in 1985 B. Current earnings per share, expected growth rate in earnings per share, and current book
is value per share of common stock.
A. P9,796,850 C. P17,597,200 C. Current earnings per share, expected growth rate in dividends per share, and current
B. P16,000,000 D. P17,796,850 market price per share of common stock.
D. Current dividends per share, expected growth rate in dividends per share, and current
 market price per share of common stock.
41. The market value of a firm’s outstanding common shares will be higher, everything else equal,
if
A. Investors expect lower dividend growth.
B. Investors have a lower required return on equity.
C. Investors have longer expected holding periods.
D. Investors have shorter expected holding periods.
42. Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70
percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent,
and the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of
interest is 5.5 percent, the market risk premium is 5 percent, and the company’s tax rate is 40
percent. Bradshaw uses the CAPM to determine its cost of equity.
What is the beta on Bradshaw’s stock?
A. 0.10 C. 1.35
B. 1.07 D. 1.48
43. Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target capital
structure is 55 percent equity and 45 percent debt. The company has sufficient retained
earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9
percent, and the company’s tax rate is 30 percent. If the expected dividend next period (D1) is
$5 and the current stock price is $45, what is the company’s growth rate?
A. 2.68% C. 4.64%
B. 3.44% D. 6.75%
Capital Budgeting
44. Capital investment projects include proposals for all of the following except:
A. the expansion of existing product offerings.
B. additional research and development facilities.
C. refinancing existing working capital agreements.
D. the acquisition of government mandated pollution control equipment.
45. A firm is considering a new capital project. A salvage company is offering the firm $800,000
for its old equipment. If the firm accepts the salvage company’s offer the net initial investment
in the project will be
A. Not determinable from the information given.
B. Less if the carrying amount is less than the $800,000 offer.
C. Greater if the carrying amount is less than the $800,000 offer.
D. Unaffected by whether a gain or loss is recognized on the disposal.
46. The Bread Company is planning to purchase a new machine which it will depreciate on a
straight-line basis over a 10-year period. A full year's depreciation will be taken in the year of
acquisition. The machine is expected to produce cash flow from operations, net of income
taxes, of $3,000 in each of the 10 years. The accounting (book value) rate of return is
expected to be 10% on the initial increase in required investment. The cost of the new
machine will be
A. $12,000 C. $15,000
B. $13,500 D. $30,000
47. Great Value Company is planning to purchase a new machine costing P50,000 with freight
and installation costs amounting to P1,500. The old unit is to be traded-in will be given a
trade-in allowance of P7,500. Other assets that are to be retired as a result of the acquisition
of the new machine can be salvaged and sold for P3,000. The loss on retirement of these
other assets is P1,000 which will reduce income taxes of P400. If the new equipment is not
purchased, repair of the old unit will have to be made at an estimated cost of P4,000. This
cost can be avoided by purchasing the new equipment. Additional gross working capital of
P12,000 will be needed to support operation planned with the new equipment.
The net investment assigned to the new machine for decision analysis is
A. P50,200 C. P53,600
B. P52,600 D. P57,600
48. Garfield, Inc., is considering a 10-year capital investment project with forecasted revenues of
$40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial
cost of the equipment for the project is $23,000, and Garfield expects to sell the equipment for
$9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The
project requires a working capital investment of $7,000 at its inception and another $5,000 at
the end of Year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the
project in the tenth year is
A. $11,000 C. $24,000
B. $20,000 D. $32,000
49. If a project has a profitability index that is greater than 1.0, it means that the
A. Cash flows exceed the initial investment.
B. Initial investment exceeds the cash flows.
C. Internal rate of return is equal to the required return.
D. Required return is less than the internal rate of return.
50. Foggy Products is evaluating two mutually exclusive projects, one requiring a $4 B 50,000 8.00%
million initial outlay and the other a $6 million outlay. The Finance Department has C 45,000 9.00%
performed an extensive analysis of each project. The chief financial officer has The company's cost of capital is 5.5%. Assuming no capital rationing, which project
indicated that there is no capital rationing in effect. Which of the following statements should it choose?
are correct? A. Do not select any project.
I. Both projects should be rejected if their payback periods are longer than the B. Select Project C because it has both attractive NPV and IRR.
company standard. C. Select Project B because it has the highest net present value (NPV).
II. The project with the highest Internal Rate of Return (IRR) should be selected D. Select Project A because it has the highest internal rate of return (IRR).
(assuming both IRRs exceed the hurdle rate).
III. The project with the highest positive net present value should be selected. Working Capital Management
IV. Select the project with the smaller initial investment, regardless of which 53. Since Marsh, Inc., is experiencing a sharp increase in sales activity and a steady increase in
evaluation method is used. production, the management of Marsh has adopted an aggressive working capital policy.
A. I and III only. C. I, II and III only. Therefore, the company’s current level of net working capital
B. II and III only. D. I, II, and IV only. A. Would most likely be higher than under other business conditions as the company’s
profits are increasing.
B. Would most likely be higher than under other business conditions so that there will be
51. Maloney Company uses a 12% hurdle rate for all capital expenditures and has done
sufficient funds to replenish assets.
the following analysis for four projects for the upcoming year: C. Would most likely be the same as in any other type of business condition as business
Project 1 Project 2 Project 3 Project 4 cycles tend to balance out over time.
Initial outlay $4,960,000 $5,440,000 $4,000,000 $5,960,000 D. Would most likely be lower than under other business conditions in order that the
Annual net cash company can maximize profits while minimizing working capital investment.
inflows
Year 1 1,600,000 1,900,000 1,300,000 2,000,000 54. Atlantic Distributors is expanding and wants to increase its level of inventory to support an
Year 2 1,900,000 2,500,000 1,400,000 2,700,000 aggressive sales target. They would like to finance this expansion using debt. Atlantic
Year 3 1,800,000 1,500,000 1,600,000 1,800,000 currently has loan covenants that require the working capital ratio to be at least 1.2. The
average cost of the current liabilities is 12%, and the cost of the long-term debt is 8%. Below
Year 4 1,600,000 1,200,000 800,000 1,300,000
is the current balance sheet for Atlantic.
Net present value 281,280 293,240 (75,960) 85,520 Current assets $200,000 Current liabilities $165,000
Profitability index 106% 105% 98% 101% Fixed assets 100,000 Long-term debt 100,000
Internal rate of return 14% 15% 11% 13% . Equity 35,000
Which projects should Maloney undertake during the upcoming year if it has only Total assets $300,000 Total debt & equity $300,000
$12,000,000 of investment funds available? Which one of the following alternatives will provide the resources to expand the inventory
A. Projects 1 and 2. C. Projects 1 and 4. while lowering the total cost of debt and satisfying the loan covenant?
B. Projects 1 and 3. 
 D. Projects 1, 2, and 4. A. Increase both accounts payable and inventory by $25,000.
B. Borrow short-term funds of $25,000, and purchase inventory of $25,000.
C. Sell fixed assets with a book value of $20,000 for $25,000, and use the proceeds to
52. Sustainable Growth Inc. is choosing from among three mutually exclusive projects.
increase inventory.
Project NPV IRR D. Collect $25,000 accounts receivable, use $10,000 to purchase inventory, and use the
A 40,000 10.00% balance to reduce short-term debt.
 turnover is 4.5, what is the average collection period and the year-end receivables,
55. The Rolling Stone Corporation, an entertainment ticketing service, is considering the following respectively (assume a 365-day year)?
means of speeding cash flow for the corporation: A. 73 days and $108,000. C. 81 days and $120,000.
● Lock Box System. This would cost $25 per month for each of its 170 banks and would B. 73 days and $120,000. D. 81 days and $200,000.
result in interest savings of $5,240 per month.
● Drafts. Drafts would be used to pay for ticket refunds based on 4,000 refunds per month 60. The sales manager at Ryan Company feels confident that, if the credit policy at Ryan’s were
at a cost of $2.00 per draft, which would result in interest savings of $6,500 per month. changed, sales would increase and, consequently, the company would utilize excess
● Bank Float. Bank float would be used for the $1,000,000 in checks written each month. capacity. The two credit proposals being considered are as follows:
The bank would charge a 2% fee for this service, but the corporation will earn $22,000 in Proposal A Proposal B
interest on the float. Increase in sales $500,000 $600,000
● Electronic Transfer. Items over $25,000 would be electronically transferred; it is estimated Contribution margin 20 20
that 700 items of this type would be made each month at a cost of $18 each, which would Bad debt percentage 5 5
result in increased interest earnings of $14,000 per month. Increase in operating profits $75,000 $90,000
Which of these methods of speeding cash flow should Rolling Stone Corporation adopt? Desired return on sales 15 15
A. Lock box and electronic transfer only. Currently, payment terms are net 30. The proposed payment terms for Proposal A and
B. Bank float and electronic transfer only. Proposal B are net 45 and net 90, respectively. An analysis to compare these two proposals
C. Lock box, drafts, and electronic transfer only. for the change in credit policy would include all of the following factors except the
D. Lock box, bank float, and electronic transfer only. A. Cost of funds for Ryan.
B. Current bad debt experience.
56. Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment C. Bank loan covenants on days’ sales outstanding.
will satisfy the firm's need for funds during the coming year. If it costs $75 to sell these bills, D. Impact on the current customer base of extending terms to only certain customers.
regardless of the amount, and Snobiz needs $167,000 a month, how frequently should the
CFO sell off Treasury bills?
A. About every 3 days. C. About every 11 days.
B. About every 9 days. D. About every 18 days.

57. When a company analyzes credit applicants and increases the quality of the accounts
rejected, the company is attempting to
A. Maximize sales. C. Increase bad-debt losses.
B. Maximize profits. D. Increase the average collection period.

58. An increase in sales resulting from an increased cash discount for prompt payment would be
expected to cause
A. An increase in the operating cycle.
B. A decrease in purchase discounts taken.
C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.

59. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables